China in the driving seat
Apr 16, 2019 11:10 pm
The new geography of manufacturing. The speed at which China is changing its energy mix, from coal to gas. Europe’s response. The interwoven fates of Rome and Beijing over the Belt and Road Initiative
In the next few weeks, the U.S. President Donald Trump and the Chinese President Xi Jinping could reach a definitive trade agreement. Italy could also find itself in a position to play some kind of bridging role betweeen Beijing and Washington. On March 22, 2019, the President of the Italian Republic Sergio Mattarella met his Chinese counterpart Xi Jinping, in Rome. On behalf of their respective countries, the two Presidents signed a Memorandum of Understanding (MoU), giving Italy an important role in the so-called New Silk Road (the Belt and Road Initiative, BRI), China’s massive trans-continental infrastructure project. Italy is the first G7 Member State and the fifth EU country after Poland, Hungary, Greece and Portugal to join the Eurasiatic strategic plan.
On April 1, 2017, the Italian financial and economic newspaper Il Sole 24 Ore pubblished an article entitled “L’identità manifatturiera nella risposta europea” [Manufacturing identity in the European response]. The author, economist Paolo Bricco, wrote that the balance structure of the long-standing international capitalism had been experiencing an equally deep reconfiguration. In particular:
1. According to UNCTAD data, in 1991, 36% of global manufacturing added value, the difference between revenues and total expenditures after labor costs, was produced in Europe with 24% in North America. In 2017, after 10 years of crisis, these rates fell to 25% and 22% respectively;
2. Since 2000, the United States of America has lost 27% of its jobs in the manufacturing sector (approximately, 6,000,000 employees), Italy 12% and Germany 8%;
3. Based on the Scenari Industriali report published by the Italian Manufacturers’ Association in November 2017, the share of China’s manufacturing production over the global manufacturing sector increased from 5% in 1995 to 8% in 2000, 19% in 2010, 22% in 2012, and 29.5% in 2017. At the same time, the U.S.’s manufacturing production share over the global manufacturing sector decreased to 19%, Germany’s share fell to 5.9%, Italy’s to 2.3% (seventh in the world) and Russia’s to 1.2% (fifteenth in the world due to the economic recession that hit the country in 2014-16). The first 2018 estimates show that China’s percentage rose to 32%, while Germany’s share decreased below 5%, with Italy maintaining its previous position in the global ranking.
It is important to highlight that the new geographical redistribution of the global manufacturing sector was accompanied by an increase in the 2017 world natural gas consumptions of 96 Gm3 (+3% y-o-y), the greatest increase since 2010, driven by industrial activity more than by power generation, as had happened in the previous decade.
China’s energy mix for 2017 was as follows:
1. Coal – 61% (decreasing y-o-y, both in absolute and relative terms, from 66% in 2014);
2. Oil – 19%;
3. Hydroelectric – 8%;
4. Natural Gas – 7% (6% in 2014);
5. Renewables – 3%;
6. Nuclear – 2%
China’s natural gas suppliers in 2017 were:
1. Domestic Production – 62%;
2. Turkmenistan – 13%;
3. Australia – 10%;
4. Qatar – 4%;
5. Malaysia – 3%;
6. Others – 8%.
China needs to change the structure of its energy mix as soon as possible, decreasing the use of coal in favor of natural gas. In 2018, China’s total natural gas imports soared by nearly 32% annually to 90.39 million tons [equal to approximately 122.9 Gm3 at 39 MJ/m3], solidifying its position as the world’s biggest importer of the fuel. The International Energy Agency forecasts that growth in China’s gas consumption will represent 37% of the total gas consumption surge to 2023, boosted by increasing economic activity and supported by the national government in order to reduce the environmental pollution.
In addition, in 2018, China also confirmed its global leadership as a crude importer. Based on the statistics provided by Chinese Customs, in November 2018, China imported a record high of 10,430,000 b/d (+8.5% y-o-y), exceeding its previous maximum of 9,610,000 b/d, achieved in October 2018.
Oil Market: Trends in March
In March 2019, barrel prices increased by approximately $3.5/b., almost reaching a four-month high. In particular, Brent North Sea quality opened at $64.99/b and closed at $68.36/b, while West Texas Intermediate crude started at $56.2/b and closed at $60.22/b. At the time of writing (April 8, 2019), Brent was trading at $70.93/b and WTI at $64.08/b, due to Saudi Arabia cutting more of its production than agreed with the members of OPEC+ last November. Prudent optimism over U.S.-China trade deal talks will have a positive effect on future oil demand. Last but not least, the resumption of the war in Libya.
More specifically, crude oil prices were rising steadily until March 20, 2019 – respectively at $68.3/b and $60/b – due to U.S. oil stocks decreasing from 449,072,000 barrels on March 8, 2019 to 439,483,000 barrels on March 15, 2019. They then slightly retreated in response to the appreciation of the dollar (€/$ 1.1218 on March 28th), before increasing again in the wake of Alexander Novak’s statements. Particularly, Russia Energy Minister said that his country would have reached its share of cuts by early April (-228,000 b/d).
Since early 2019, the European and Asian benchmark and the American blend have respectively rose by 25% and 30%, as a consequence of the OPEC+ cuts, as well as supply disruptions in Venezuela (-142,000 b/d in February, although stable in March) and Iran, which have countered the growing American tight oil production (12,100,000 b/d since February).
According to Goldman Sachs bank, “the latest Brent rally has brought prices to our peak forecast of $67.5/b, three months early. Resilient demand growth [estimated to surge by 1,450,000 b/d in 2019] and supply outages could push prices up to $70/b in the near future. Supply loses are exceeding our expectations, demand growth is beating low consensus expectations with […] net long positioning still depressed”.
This situation may potentially be a perfect bullish storm unless next May U.S. President, Donald Trump, prolongs purchase waivers over Iranian oil, which is currently under U.S. sanctions.
Based on figures provided by the Oil Market Report, published by the International Energy Agency on March 15, 2019, world oil supply dropped by 340,000 b/d in February, to 99,700,000 b/d. In particular, OPEC output fell by 250,000 b/d, to 30,680,000 b/d. OECD commercial stocks rose by 8,600,000 barrels in January 2019 (month-on–month), the highest level since November 2017.
Global oil demand growth in 2018 and 2019 is forecast at 1,300,000 b/d and 1,400,000 b/d respectively, with China and India leading the surge.
Based on the Drilling Productivity Report figures issued by the Energy Information Administration on March 18, 2019, American unconventional crude output is expected to increase by 65,000 b/d to 8,592,000 b/d in April 2019.
U.S. crude production, after a previous high of 9,627,000 b/d reached in April 2015, decreased to a nadir of 8,428,000 b/d on July 1, 2016. It then started increasing to 12,100,000 b/d (reached on February 22, 2019) and maintained this high level throughout March (weekly forecasts).
Based on statistics provided by Baker Hughes on March 29, 2019, the 1,006 current U.S. active rigs, of which 816 (81.1%) are oil rigs with 190 (18.9%) gas rigs, a total of 32 less than on March 1st 2019. This was the lowest number in almost a year, having fallen for a sixth consecutive week. On March 26, 2019, Bloomberg wrote, “American frackers are tightening their belts following a plunge in crude prices in late 2018 and as investors urge drillers to do more with less”.
In January 2019, U.S. crude oil imports strongly increased to 7,520,000 b/d, from 7,099,000 b/d in December 2018. 2018 U.S. crude oil imports stood at 7,757,000 b/d on average, a fall in comparison with the 2017 average of 7,969,000 b/d and the 2016 statistic of 7,850,000 b/d, if still higher than the figures for 2015 (7,363,000 b/d) and 2014 (7,344,000 b/d).
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